We Do Not Know The Effects Of The 'Trade War'

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by: Steven Hansen

Summary

Most pundits are trying to spin the effects of the U.S.-China trade war.

The truth is that no one has enough information or data to offer any more than opinion.

This is not 1920, and trade/global production is very different in the 21st century.

I continue to be amazed at many analysts who are shoveling opinion masquerading as fact on the impact of a trade war between China and the U.S.

Many analysts are discussing impacts like:

  • how $200 billion of duties on both China and the U.S. would affect U.S. exporters more because the U.S. imports 4 times more goods from China than China imports from the U.S.;
  • or loss of jobs;
  • or effects on U.S. and China currencies (commentary is very mixed);
  • effects on global productivity.

This is flat world thinking as one must believe that the world overproduces and supply chains are fungible. If China stops buying from the U.S. and buys from "others" - where will the countries that trade with "others" get their goods?

My last missive on trade was Trump's Trade War Is A Tempest In A Teapot, and this is a continuation of this topic. My theme in this commentary and previous commentaries is that no one is smart enough to evaluate the impact. I still see little potential impact of the current trade wars.

One analyst, Bill Winters, chief executive officer of Standard Chartered Bank, seems to have his head screwed on straight as reported in a CNBC post:

The impact of a potential $200 billion worth of tariffs on China would depend on how supply chains adjust, according to Winter. If the global supply chain starts to circumvent the Chinese market altogether because tariffs make it too expensive, then that would "certainly have a knock-on consequence for trade between China and the rest of Asia, given how interlinked the supply chains are between China and its neighbors," he said.

There is overproduction

Before continuing this line of argument, the U.S. specifically overproduces farm products due to agriculture subsidies. The agriculture industry is paid to keep fields fallow or provide price support for products, including wheat, feed stock grains (maize/corn, sorghum, barley and oats), cotton, milk, rice, peanuts, sugar, tobacco, oilseeds, and meat products such as beef, pork, and lamb and mutton. And the U.S. is far from the only subsidizer of farm products - and the list includes the E.U., China, Indonesia, Japan and South Korea.

When it comes to farm products, the supply is currently larger than demand - and in most cases, the world has options where to purchase. Note that the example of soybeans accounts for 1.6 percent of total value of U.S. exports.

Supply Chains

Most goods are made to order or manufactured in quantities to meet anticipated demand. There is little overproduction. Production can be ramped up on most products - but except for relatively minor changes, it takes time to increase production. Supply chains are designed to have little slack - as it costs money (and ties up capital) to have the ability to supply in much greater volumes. We live in a "just-in-time-delivery" world.

Transshipment

Although not legal, it is more than possible to ship U.S. soybeans or processed soy meal to China with documentation saying produced in Brazil (or anywhere else). There are many ways to execute this task, and there are brokers/agents/business people who do this for a living. This can happen for almost all crude and partially processed commodities - as well as some finished goods.

Global Production by Multinationals

Many products are produced in multiple locations around the world. The world is very different than the world of the Great Depression where trade tariffs disrupted supply. And there are very few products produced today where it was not created from components manufactured from around the world.

It is the price stupid

The real affect of tariffs will be changes to prices consumers pay. Some prices will go up - and others will go down - but most prices will be unaffected by tariffs. [If there is an abundance of soybeans, likely the consumer will see soy products sold at lower prices.] The old laws of supply and demand will govern. Supply is mostly a given - but demand varies based on price. Some demand will change due to substitution (instead of buying steak, they will buy hamburger). Some producers will be able to absorb cost increases. Some products can be purchased from a source which will not incur duties. So the impact on prices is largely unknown - it all depends on how producers react to the potential price increases.

Change creates confusion

Both good and bad change disrupts - and tariffs will disrupt while supply chains re-optimize based on new conditions. At this point, the disruption will be minimal.

Avoid Tariffs

Tariffs are bad on several levels. But when your trading partner is taking advantage and refuses to negotiate to have a level playing field - the only option may be tariffs. Tariffs are a tax on the consumer to punish them for wanting a product your government does not want you to buy.

Bottom Line

The scare headlines being pumped out are currently baseless. We honestly do not know the affects of this "trade war" because no one has enough information on the supply chains. Grab some popcorn and enjoy the movie.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.